The statement delivered by the Fed today was brief and to the point — largely as anticipated. Fed policymakers were content to stand pat, holding the central bank’s policy rate unchanged in a range of 4.25–4.5%.
The underlying foundations of the economy have firmed up considerably, allowing it to plow ahead through recession concerns and high inflation over the past few years. The strength of consumer spending helped to carry that momentum through the end of 2024 and into 2025.
It was a deterioration in labor conditions and gradual increase in unemployment that caused the Fed to recalibrate its assessment of the balance of risks last year, stepping away from an intense focus on inflation as its primary policy challenge, prompting the transition to policy easing last September.
More recently, labor conditions appear to have stabilized, while some measures of inflation have edged higher in recent months. Those changes weren’t lost on policymakers. The Fed’s December statement referenced continued progress of inflation moving toward the central bank’s 2% goal. Today’s statement only acknowledged that inflation remains elevated — a meaningful shift in tone that helps to explain their decision to hold rates steady for now.
The inflation outlook has been further clouded by the potential inflationary impact of a host of tariffs against major trade partners, including Canada, Mexico, the European Union, and China.
The near-term risk that inflation could experience at least a modest resurgence is real and not being overlooked by policymakers. The magnitude of these tariffs remains an open question that will hinge on multiple factors. How large might those tariffs be? How broadly might they be applied? How long could they be in place? What retaliatory measures could be taken by American’s trading partners in response? How great is the risk of a slowdown in growth coupled with rising inflation — a stagflationary outcome that would present a particular challenge for monetary policymakers? These are questions with no definitive answers today.
Given the many lingering questions on trade and fiscal policy and the resulting range of potential outcomes, the Fed appears to be content to hold the line for now, while maintaining the flexibility to adjust their policy path as needed to address the balance of risks between its employment and inflation goals. Against that backdrop, the Fed has moderated its prior rate cut projections for 2025 and appears to be taking a “wait-and-see” approach that will evolve based in part on fiscal policies that could bring inflation risk back to the forefront.
A March rate cut can’t be ruled out but still seems unlikely. Policymakers will have both the January and February consumer inflation reports in hand when they meet mid-March. Those will need to show that inflation is softening, particularly if unemployment holds steady or edges lower and job creation remains firm. It’s unlikely that there will be clarity and stability in trade policy, and the ripple effects of any additional taxes on imports will take time to feed through to inflation data. As a result, the questions that hang over the inflation outlook and rate policy today are likely to continue to create doubt in the coming months.
In the absence of clear progress toward the 2% goal, the Fed appears poised to continue to hold for the time being. A hike can’t be ruled out if inflation reaccelerates, but tariff threats alone don’t appear likely to lead to an outright reversal in rate policy in the near term. They’re a risk though that will give Fed policymakers one more factor to consider before trimming further and could lead to a need to hike if inflation flares again.
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